Stock Analysis: Sri Trang Agro (STA) and Sri Trang Gloves (STGT)

I am a buyer of this stock as it ticks many boxes, such as positive momentum, near term pricing power, capacity expansion, favorable industry, customer loyalty and global franchise. Yes, I am talking about STGT, the gloves maker.

In the last five days, the share price of STGT fell 15 per cent, which is in line with a similar fall experienced by its regional peers. I think the possible reason behind the sharp fall, what many may call as profit-taking, is the news that Russia succeeded in making a vaccine for COVID-19.  While the effectiveness and the production capability of the vaccine are still questionable, a vaccine will not reduce the demand for gloves for an awfully long time.

This is because it is difficult, if not impossible, to prepare a vaccine for the world’s population. It may even take years before the COVID-19 scare will be reduced to a normal level, and even if it happens, demand for gloves will not diminish because gloves are for prevention and they are not a cure. The spread of the epidemic has exposed weakness and insufficiency in the global health care system. The gloves demand curve has shifted upwards from a permanent change in the health care system.

STGT reported a stellar profit of 1.01 billion baht of profit for the second quarter. This is a blowout result compared with an average estimate of 650 million baht. The company reported a profit after the market closed on Friday.

Such a stellar result will prompt a significant profit upgrade as the company earned 1.5 billion baht in the last six months. If the profit run rate remains the same as of the second quarter (for example, 1.0 billion a quarter) STGT will earn at least 3.5 billion baht for 2020.

The market knows that STGT production capacity will increase in the third and fourth quarter – and it has sold out its entire production until the middle of 2021.

The consensus target price for this stock is 102 baht and this will increase when analysts estimate in stellar second-quarter profit.

Equistock continues to prefer STGT over STA even though STA also reported a strong profit of 1.3 billion baht for the second quarter of which 1.0 billion came from its 100 per cent holding of STGT.

From this quarter onwards, STA’s profit will fall due to reduced holding in STGT to 51 per cent following listing of the later.

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